5 Things You Think You Know About Investment (But Not Really)

Published : 1 week ago, on 01/10/2024

There’s a reason why the Dunning-Kurger effect is so problematic. When you know that you don’t know something, you’re cautious about it. However, if you scratch the surface, what you find underneath seems simple enough; you’ll just stop thinking about it. You’ll feel like you’ve “done your research,” and you’ll feel confident in your bad assessments.

In order to help you become more resilient to this, here are a few things you think you know about investment but you clearly don’t know enough. 

• Just buying different stocks is not enough

Spreading your money across different stocks is a start, but it’s not enough. True diversification means adding other asset types to your portfolio, like bonds, real estate, or commodities. These assets often behave differently than stocks, offering a buffer when markets turn volatile.

Diversification works best when the assets in your portfolio don’t move in tandem. If one investment dips, another might rise, balancing things out. Look for assets with low correlation, meaning their prices don’t typically move together. This strategy can help smooth out the ride.

Each asset class plays a unique role in your portfolio. Stocks can provide growth; real estate offers stability and income; commodities hedge against inflation; and cryptos add a speculative edge. By mixing these, you’re not just diversifying but also tapping into different financial opportunities.

It’s tempting to go all-in-one big name, like Bitcoin, but even within the crypto space, diversification is key. Consider spreading your investment across different types of cryptocurrencies, including newer options through presales or Initial Coin Offerings (ICOs).

This is especially because, according to tech specialist Kane Pepi, crypto presales give you a chance to buy a lot of coins at a discounted price, which means that your investment and exposure are not that great (source: https://www.techopedia.com/cryptocurrency/best-presales). This gives you an opportunity to split your investments further (even with a smaller investment budget), so you’re not betting everything on one coin.

• Timing the market is impossible

If timing the market sounds easy, think again. Even seasoned investors struggle to predict when to buy low and sell high consistently. Market movements are influenced by countless factors, many of which are unpredictable. Instead of trying to guess the perfect moment, focus on long-term growth.

The reality is even the most experienced investors and analysts can’t always get it right. Market predictors are often educated guesses at best. If the props can make mistakes, it’s a sign that market timing isn’t a reliable strategy.

Instead of obsessing over when to enter or exit the market, it’s better to stay invested for the long haul. The more time your money spends in the market, the more potential it has to grow. Compound interest and market recovery from downturns work in your favor over time.

One way to avoid the stress of market timing is dollar-cost averaging. This strategy involves regularly investing a fixed amount of money, regardless of market conditions. Over time, you’ll buy more shares when prices are low and fewer when they’re high, averaging out your investment costs.

• High returns mean high risk

High returns might sound enticing, but they usually come with a catch: higher risk. Investments promising big rewards often involve significant uncertainty or volatility. While the potential for profit is there, so is the potential for loss. It’s crucial to weigh these risks before diving in.

Be wary of any investment claiming to offer high returns with little to no risk. In reality, there’s no such thing as a guaranteed high-return investment. If something sounds too good to be true, it probably is. Always do your homework and understand what you’re getting into.

Everyone’s risk tolerance is different. Some people are comfortable with the ups and downs of high-risk investments, while others prefer a steadier ride. Knowing your own risk tolerance helps you build a portfolio that aligns with your financial goals and provides peace of mind. Don’t take on more risk than you can handle.

Diversifying your portfolio across different asset classes and investments is a smart way to manage risk. By not putting all your eggs in one basket, you reduce the impact of any single investment’s poor performance on your overall portfolio. It’s a key strategy for long-term investing success.

• Real estate is always a safe bet

While real estate is often seen as a stable investment, it’s not immune to downturns. Property markets can crash, just like stock markets, wiping out significant value. Economic factors, interest rates, and even local issues can impact real estate prices. It’s essential to recognize that this asset isn’t risk-free.

The value of real estate is heavily influenced by location and timing. A property in a booming area can appreciate quickly, while one is a declining region may lose value. Similarly, buying at the wrong time, like during a market bubble, can lead to losses. Always research before investing.

Real estate requires a substantial initial investment, often involving down payments, closing costs, and legal fees. Beyond that, ongoing maintenance, property taxes, and unexpected repairs can add up. These costs can eat into your profits, making real estate a more complex investment than it might appear.

Real estate isn’t as liquid as stocks or bonds. If you need to access your money quickly, selling a property can take time and involve additional costs. This lack of liquidity can be a significant drawback if you’re looking for investments that are easy to cash out in an emergency.

• You don’t need a financial advisor

It’s easy to think you can handle your investments solo, but financial advisors bring expertise that can be invaluable. They’re trained to navigate the complexities of financial markets and can help you make informed decisions. If you’re unsure about where to invest, an advisor can be a wise ally.

Some investments, like tax-advantaged accounts, estate planning, or intentional markets, can be complex to manage on your own. A financial advisor can guide you through these intricacies, ensuring you’re taking advantage of all available opportunities and avoiding potential pitfalls. Their insights can save you time and money.

A financial advisor doesn’t just offer general advice – they tailor their recommendations to your specific financial situation and goals. Whether you’re saving for retirement, buying a home, or planning your child’s education, an advisor can create a strategy that aligns with your needs and risk tolerance.

Investing can be an emotional rollercoaster, especially during market downturns. A financial advisor provides an objective perspective, helping you stay calm and stick to your long-term plan. They can prevent you from making impulsive decisions based on fear or greed, which can harm your financial future.

A bit deeper knowledge can save you from a lot of problems

One of the things you have to understand is that knowing something vaguely can be more dangerous than not understanding it at all. This is because it gives you the confidence to take a risk that you really have no business taking. So, before making any decisions, make sure to get as informed on the topic as you possibly can. This way, you’ll understand exactly what you’re getting into and have more control over the outcome.